IRS Penalties Tax Procedure Trust Fund Penalties

You Cannot Dodge Notice for the Trust Fund Recovery Penalty

It is almost always advisable to keep on the lookout for and open correspondence from the IRS. The Haben v. Commissioner, T.C. Summary Opinion 2015-55, case provides an example. In Haben, the U.S. Tax Court concluded that a taxpayer could not contest a trust fund recovery penalty during a collection due process hearing because he had intentionally avoided receiving an IRS letter that would have allowed him to dispute the penalty.

Facts & Procedural History

Mr. Haben was employed by American Consolidated Transportation Cos., Inc. (ACTC) as its controller. Mr. Haben did not own ACTC.

Beginning in 2006 and in the years that followed ACTC lost several important contracts, it filed for bankruptcy in July 2009, and one of its subsidiaries subsequently failed to pay Federal employment taxes to the IRS.

On December 13, 2012, the IRS interviewed Mr. Haben about the unpaid employment taxes.
Mr. Haben resigned his position at ACTC on December 19, 2012.

On January 15, 2013, the IRS mailed Mr. Haben a Letter 1153, Trust Fund Recovery Penalty Letter, stating that the IRS proposed to assess Section 6672 penalties against him as a person who failed to pay over the employment taxes.

The U.S. Postal Service made several attempts, but was not able to deliver the letter to Mr. Haben. The letter was eventually returned to the IRS marked “RETURN TO SENDER UNCLAIMED UNABLE TO FORWARD.”

Mr. Haben first learned that the Section 6672 penalties had been assessed when the IRS notified him that it would withhold a Federal income tax refund that he had claimed for 2012.

On September 30, 2013, the IRS sent Mr. Haben a Final Notice of Intent to Levy and Mr. Haben requested a collection due process hearing.

About the Trust Fund Recovery Penalty

Employers are required to withhold, and subsequently pay over to the IRS, Federal income and employment taxes from the wages of their employees. These taxes are commonly referred to as “trust fund” taxes.

The Code provides that any person who is required to collect, truthfully account for, and pay over any tax who willfully fails to do so is liable for a penalty equal to the amount of tax not accounted for and paid over. This is referred to as the “trust fund recovery penalty.” The IRS generally has to send a notice of assessment for this type of tax penalty before it can assess the tax.

Contesting the Penalty in Court

The issue in this case was whether Mr. Haben could contest the trust fund recovery penalties during the collection due process hearing.

The IRS refused to allow Mr. Haben to challenge the penalty assessments at the hearing. It argued that Mr. Haben had failed to take advantage of a prior opportunity to challenge the assessments in question, and, therefore, he could not contest the existence or amount of his liabilities during the administrative hearing.

Mr. Haben did not agree. He asked the court to review the IRS’s decision.

Mr. Haben testified that he did not receive the letter from the U.S. Postal Service and that he was unaware that the IRS had proposed to assess Section 6672 penalties against him. Mr. Haben also testified that he may have been traveling away from home when the U.S. Postal Service attempted to deliver the Letter 1153, and he speculated that the U.S. Postal Service may have attempted delivery to the wrong mailbox.

Collection Due Process Hearings

Sections 6320 and 6330 do allow taxpayers to contest the tax liability in collection due process hearings if they have not had a prior opportunity to dispute the liability. The courts have concluded that a taxpayer cannot intentionally avoid receiving an IRS notice and then argue that they did not have the ability to dispute the tax liability pursuant to Sections 6320 or 6330.

The court considered the evidence, which consisted of testimony from the U.S. Postal Service mail carrier and Mr. Haben. In evaluating this evidence, the court found the mail carriers testimony to be more persuasive. As such, the court concluded that Mr. Haben was precluded from contesting his liability for Section 6672 penalties during the collection due process hearing.

This limited Mr. Habens remedies for contesting these penalties. Presumably Mr. Haben would have to pay the tax and file a refund claim to recoup the payment or submit an offer in compromise based on doubt as to liability to contest the penalty assessments.